Bank of England rate setters have warned that a rise in interest rates this year is more likely than had been widely thought.

Minutes from the Monetary Policy Committee (MPC) earlier this month disclosed that at the time they found it "somewhat surprising" that markets attached only a relatively low probability to a hike by the end of the year.

This echoes remarks by Bank governor Mark Carney in his Mansion House speech last week that the first hike in interest rates could come sooner than expected.

Bank officials expect growth to slow in the second half of the year but said the risk that this would not happen might mean "slack" or spare capacity in the economy was used up more quickly than thought.

This key measure is being used by policy makers to determine when interest rates might be able to rise from their current historic low of 0.5%, where they have been for more than five years.

The minutes said that in the context that this slack might narrow more quickly than expected, the relative low probability attached to a Bank rate increase this year implied by some in financial markets was "somewhat surprising".

At the time of the latest MPC meeting on June 4 and 5, analysts were expecting rates to rise in the first half of next year, with only a 15% chance of it taking place by the end of 2014.

The minutes showed the nine committee members voted unanimously to maintain the rate at 0.5%, despite speculation that some might have voted for a hike this month.

But they added: "For some members the policy decision had become more balanced in the past couple of months than earlier in the year."

Unemployment has fallen much more rapidly than expected, causing forecasts for the first rate hike to be brought forward from last year when it was not expected to happen until 2016.

The pound slipped close to 1.69 US dollars after the minutes revealed no members voted for a rate hike. Sterling was also lower against the euro.

Alan Clarke of Scotiabank said it was not the "hawkish" set of minutes many had assumed in the wake of Mr Carney's Mansion House speech.

Martin Beck, senior economic advisor to the EY ITEM Club, said there was a "more dovish tone" than in the governor's remarks.

However, Markit chief economist Chris Williamson said the minutes "add to the expectation that rates will start to rise later this year, providing the economy maintains its current momentum as we move through the summer months".

Samuel Tombs of Capital Economics said: "The risk of a 2014 hike is clearly growing."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The minutes of the June MPC meeting do little to dilute substantially increased expectations that the Bank of England will lift interest rates from 0.50% to 0.75% before the end of 2014.

"Equally though, the June MPC minutes do not provide a further major boost to the increased expectations for an early interest rate hike."

Investec economist Philip Shaw said: "After some deliberation, markets decided that the minutes were not quite the signpost towards higher rates that they had expected. Hence sterling backed off a touch."

The minutes showed the Bank expects to see growth of 0.9% in the second quarter, easing back to 0.7% in the third quarter, though the strength of business surveys suggested there was a risk this could be higher.

They said housing market activity appeared to have weakened since the start of the year, with mortgage approvals falling for the third consecutive month in April - though it was hard to know how long this would last.

This may have been connected with new rules tightening mortgage lending criteria or weaker housing supply.

But household demand more widely remained strong with retail sales growth in April the strongest in 10 years, the minutes noted.

The minutes said the Bank's Financial Policy Committee - widely expected to take action to cool the property market next week - would "have an opportunity to consider the issues related to the housing market".

There remained "considerable uncertainty" around the key measure of "slack" though the central view that this spare capacity in the economy remained in the 1-1.5% range.

While unemployment had continued to fall, wage growth had been "surprisingly weak" possibly reflecting "entrenched expectations of modest pay increases following the considerable period of restraint".

Comments (1)

All you people who are just making ends meet every month are going to feel the pain more when the Bank of England's Canadian Manager raises the Bankers interest rate, mortgages coming out of fixed are going to cripple the house hold budget.

Not fair, tax the bubble makers not the rest, post bubble tax them more, pre-bubble leave their rate alone, when the bubble reduces, reduce the bubble makers interest rate, this is not hard to do, might be less profit for the Bankers but it will help to keep the economies inflation low, it's better to have the money in the people's pocket's so they can spend it, better than being in the Bankers Bank....

All you people who are just making ends meet every month are going to feel the pain more when the Bank of England's Canadian Manager raises the Bankers interest rate, mortgages coming out of fixed are going to cripple the house hold budget.
Not fair, tax the bubble makers not the rest, post bubble tax them more, pre-bubble leave their rate alone, when the bubble reduces, reduce the bubble makers interest rate, this is not hard to do, might be less profit for the Bankers but it will help to keep the economies inflation low, it's better to have the money in the people's pocket's so they can spend it, better than being in the Bankers Bank....welshmen

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